Sri Lankan banks managed capital impact of first-time adoption of SLFRS 9 accounting standards says Fitch
International rating agency Fitch has reportedly said that Sri Lankan banks have been able to manage the capital impact of first-time adoption of SLFRS 9 accounting standards.
Fitch has stated that this was in line with its expectations and due to capital infusions ahead of full implementation of Basel III, satisfactory profitability buffers and the four-year phasing-in period.
According to reports, Sri Lanka adopted SLFRS 9 on 1 January 2018, but banks were permitted to follow the older accounting standard, SLAS 39, in calculating credit costs until end-2018. Two banks reported credit costs under SLFRS 9 at end-3Q18; the rest moved to SLFRS 9 in their end-2018 statements.
The local regulator has allowed banks to spread the one-time impact of SLFRS 9 implementation over four years for the purpose of calculating regulatory capital ratios, media reports state. This reduces pressure on banks to raise capital over and above the equity they have already raised (Rs. 50 billion in 2017 and Rs. 24 billion in 2018) in preparation for full implementation of Basel III on 1 January 2019.
Twelve of the 16 local Fitch-rated banks have now disclosed the day-one impact of SLFRS 9 in their 2018 financial statements, based on their end-2017 balance-sheet position.
Eleven of the 12 banks could have met the Basel III capital ratio requirements in full at 1 January 2019, even without the permitted capital benefit from deferring the SLRFS 9 impact.
Fitch has estimated that the day-one impact of SLFRS 9 may also reduce its Tier 1 ratio to just under 10%, based on Fitch’s analysis of its end-3Q18 disclosures. However, the four-year phase-in should help to keep both BOC and People’s Bank just above the minimum regulatory ratio.
“We believe that banks that need or choose to strengthen capital buffers will continue to raise capital in 2019. However, they could face execution risks given the macro instability. Furthermore, we expect asset quality to remain under pressure, as reflected in a rise in rescheduled loans and a surge in non-performing loans in 2018. We expect asset-quality pressures to remain manageable but we will reassess the trends if loan impairments significantly exceed our expectations,” it has added.
OSL take:
The statement by the international rating agency is indicative of the advance standards of banks in Sri Lanka. Sri Lanka’s banking sector has been on a continuous growth path. Therefore, foreign businesses/investors interested at doing business in Sri Lanka could confidently engage with the local banks.
| Article Code : | VBS/AT/26032019/Z_2 |